- Lithia Motors has proven itself to be an interesting company in recent years, with a strong record for growth behind it.
- The company continues to generate attractive cash flows, even during the pandemic.
- A return to normal is more or less priced in and the company looks to be about fair value, but it could be an attractive long-term prospect to ride.
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Car dealerships are not an area that many investors would consider exciting. This might be especially the case when you consider that 2020 has been the time of COVID-19. A contracting economy and the ensuing stretched incomes do not bode well for vehicle sales. One good firm in this market to consider, though, is Lithia Motors (LAD). A major player in the space, Lithia continues to surprise investors, and although 2020 has been, in some ways, a slow year for the firm, cash flow looks attractive and management continues to plan for the long haul.
A look at Lithia Motors
Lithia Motors is a major player in the car dealership space. As of the end of its 2019 fiscal year, the company owned 188 retail locations. Primary operations consist of selling new, used, import, and luxury vehicles. At that time, the company had a location operated within a short distance of 92% of Americans.
On November 10th, management bought assets from Keyes Automotive Group, amounting to 9 locations with a combined $1.4 billion in annual sales. Last year, these locations sold 21,600 new vehicles and 10,350 used ones. Its second most-recent acquisition was of assets owned by Sterling Luxury Group. Annualized revenue of $225 million from it will put the company’s fiscal 2020 acquisitions to the point of generating $3.4 billion in sales each year. A further deal, announced on December 1st, adds another $100 million to this picture for $3.5 billion on an annualized basis.
This expansion has helped Lithia so far in 2020, but even that kind of growth has not made it possible for the company’s sales to rise for the full year so far. In the third quarter of its 2020 fiscal year, sales came in at $3.62 billion. This is 8.6% above the $3.33 billion seen the same time last year. However, for the first three quarters as a whole, revenue of $9.18 billion is 2.4% lower than the $9.40 billion seen in the same three quarters of 2019.
Though sales have been weak so far this year, the company’s bottom line has been robust. Net income in the latest quarter, for instance, came in at $158.8 million. This is nearly double the $85.2 million the company generated in the third quarter of its 2019 fiscal year. For the first three quarters, profits are also up, having risen from $203.5 million last year to $282.7 million this year. To see net income rise even as sales fall is encouraging. What may be a factor here are the sales associated with used vehicles. Used vehicles generally generate stronger profit margins than new ones do. So far this year, new vehicle sales have dropped 7.4%.
